Pension schemes, insurers and advisers have come together to align ESG policies and reporting around pension risk transfer transactions.
Pension schemes, insurers and advisers have all pledged to incorporate sustainability principles into the bulk annuity process through signing a new charter.
The move aims to bring improved transparency on environmental, social and governance (ESG) issues when pension schemes are going through buy-in or buyout transactions.
The Sustainability Principles Charter was launched today (30 January) after a period of development by Accounting for Sustainability, the Church of England Pension Board and Railpen. It has been co-signed by six insurance companies, six consultancy groups, four major pension schemes and the Pensions and Lifetime Savings Association (PLSA).
With expectations and regulatory requirements around ESG increasing for both pension schemes and insurance companies, the charter aims to bring transparency and alignment around these issues to help trustees when going through an insurance transaction.
It has four principles: transparency around sustainability policies and values; evidence-based decision-making; reporting and engagement, including after transactions are completed; and collaboration between interested parties as sustainability best practice evolves.
The rising importance of the bulk annuity market
Consultancy WTW has predicted £80bn worth of assets and liabilities will be transferred from pension schemes to insurance companies this year. This is on top of an estimated £50bn that was transferred in 2023, and the annual amount is expected to remain at around this level for the next few years.
The Prudential Regulatory Authority, which oversees the insurance sector, wrote to banks and insurers last year emphasising that they must understand and disclose the financial risks to their businesses posed by climate change.
Kerry King, director of capital markets at Accounting for Sustainability, highlighted that many DB schemes had made public commitments related to sustainability and so required transparency on ESG issues throughout the bulk annuity process.
Stephen Barrie, deputy chief responsible investment officer at the Church of England Pensions Board, said: “By signing the charter, signatories are recognising the importance of transparency, embedding sustainability into decision making, ongoing reporting to members and trustees, and engagement across the sector as best practice evolves. Not only will it be a helpful guiding tool during the bulk annuity process, but it also means that we are all playing an active role in investing in a more sustainable world for members to retire into.”
'Big improvements' in ESG
Paul Hewitson, head of ESG for risk transfer at Hymans Robertson, said: “As more pension schemes reach the point where buyout is affordable, ESG considerations are becoming increasingly important in trustees’ selection criteria, when picking which insurer to transact with. This charter helps set expectations of the minimum requirements on sustainability, while also pushing insurers to do more, with clear examples of how they can differentiate themselves in a busy insurance market.”
Charlie Finch, partner in LCP’s de-risking team, said LCP had observed “big improvements” to insurance companies’ sustainability credentials over the past five years.
“When our pension scheme clients transact, they are entering into a long-term, essentially irreversible contract,” Finch explained.
“Sustainability objectives such as achieving net zero emissions by 2050, reversing the destruction of nature and addressing social inequalities are critical for protecting the health of the economy and hence insurers’ ability to pay the promised benefits. The charter therefore helps support the long-term security of members’ pension benefits.”
As well as Accounting for Sustainability, the Church of England Pension Board and Railpen, signatories include Aon, Aviva, Cancer Research UK Pension Scheme, Cardano, HSBC Bank (UK) Pension Scheme, Hymans Robertson, Just Group, LCP, Legal & General, Mercer, Pension Insurance Corporation, the PLSA, Pi Partnership Group, Redington, Rothesay and Standard Life.
